Shares in Tesco jumped nearly 5 per cent this morning after the competition watchdog gave the green light to its £3.7billion deal to buy food wholesaler Booker.
The provisional clearance by the Competition Markets Authority comes despite concerns raised by the watchdog itself earlier this year, and also by rival wholesalers, that the tie-up could lead to higher prices in about 350 areas across the UK.
Tesco operates more than 3,000 stores but would also become a major supplier of small retailers if it bought Booker, which supplies more than 5,000 stores including the Premier and Londis chains.
But today the CMA said that Tesco and Booker do not compete ‘head-to-head in most of their activities’, after having considered the impact of the merger in every local area where a Tesco and a Booker-supplied shop are both present.
‘It did this to examine whether, in any of these areas, it might be profitable for the merged company to raise prices or reduce service levels either in retail or wholesale,’ the watchdog said in a statement.
‘The CMA has provisionally concluded that the level of competition in the grocery wholesale and retail markets would be sufficient to defeat such a strategy.’
It added that in particular, Tesco does not supply the catering sector to which Booker makes over 30 per cent of its sales.
Shares in Tesco rose by 4.9 per cent, or 8.8p, to 185.80p in morning trading. Despite today’s rally, Tesco shares are down 10 per cent since the deal was mooted in January.
Shares in FTSE 250 listed Booker also rose by 4.9 per cent, or 9.9p, to 208.5p.
Neil Wilson, senior market analyst at ETX Capital, said the 24 per cent premium paid for Booker ‘scrubs a lot of the value off the deal’.
So are investors really going for this deal? ‘The big risk seen by investors is that Tesco takes its eyes off the turnaround strategy,’ Wilson said.
He added: ‘The rationale for the deal is to tie up the end-to-end wholesale/retail business and generate savings in the process. Cost synergies of around £200m a year, mainly from buying and distribution, are the main selling point for Tesco shareholders.
‘Management has said that the merger will generate a return greater than the cost of capital within two years of completion. EPS will increase in year two as well, although this excludes ‘implementation costs’. Tesco shareholders Schroders and Artisan Partners said it was too expensive and too risky.’
While 50 per cent of Tesco investors must give the deal the green light, the threshold is 75 per cent for Booker shareholders.
The watchdog is set to make its final decision in December.